TOL - 1st Apr, 2023
4 adviser-approved ETFs for 2023 (and top tips to make your portfolio work for you)
In this episode, Shaw and Partners' Candice Bourke and Pitcher Partners' Charlie Viola share how they use ETFs in client portfolios.
With more than 280 exchange-traded products listed on the ASX, Livewire is on a mission to learn whether investors, like you, can build the perfect portfolio with listed products alone.
A few quick stats for you:
- Over the past 12 months (to the end of February), the market cap of the Australian ETF market swelled 7.1% to $136.2 billion.
- The majority of investors' funds are invested in global equities-focused ETFs ($61 billion, down slightly on the prior year).
- $38 billion is invested in ETFs tracking Aussie equities exposures (up 12% over the past 12 months).
- Interestingly, investments in fixed income-focused ETFs have skyrocketed more than 22% in that same time period to $19.5 billion.
So, how do you decide which products would best help you compound your hard-earned cash?
In this episode, Livewire's Ally Selby was joined by Shaw and Partners' Candice Bourke and Pitcher Partners' Charlie Viola for their go-to funds for both equities and defensive exposures.
They also share the biggest mistakes they are seeing in the client portfolios they have inherited over the past 12 months, and their top tips for how investors can make their portfolios work for them (instead of the other way around).
And just because you know this anonymous writer loves a little bit of spice, we also asked Charlie and Candice to name a product or fund they believe no longer has a place in investors' portfolios.
Note: This episode was filmed on Wednesday 22 March 2023. You can watch the video, listen to a podcast, or read an edited transcript below.
Edited Transcript
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and in this episode today, we'll be taking a deep dive into the wonderful world of listed products. You'll learn how to make your portfolio work for you, as well as some of the top listed products financial advisors are liking today. To do that, we're joined by Charlie Viola from Pitcher Partners and Candice Bourke from Shaw and Partners.
Okay, let's dive straight in. Charlie, I might start with you. What's the biggest problem you've really noticed in portfolios that you've inherited over the last 12 months? What are we investors getting wrong?
The biggest problems in portfolios today
Charlie Viola: We went through a period a couple of years ago where multiples were running out and markets were doing really well, which meant that people forgot about the fundamentals. So we've probably taken on a bunch of portfolios over the last 12 months with just a whole bunch of rubbish in them, a whole bunch of buy-now, pay-later and EV-type stuff. My message to everybody is just to go and buy quality. So it's been weeding out all of the garbage that we've seen in those portfolios and just this flight to good quality stuff.
Ally Selby: Over to you, Candice. What are you noticing? What are the problems that you're seeing in the portfolios that you're inheriting at the moment?
Candice Bourke: Agree with what Charlie's saying. Definitely in the last two to three years with COVID, it has been a challenging market to make returns. One thing I would add to Charlie's point is we have seen a lot more passive ETFs that aren't beating the benchmark and not keeping up with the current markets. In the last week or so, we've seen everything develop. Things are moving very quickly. So the message I'm saying to clients is, "Let's be more active and make sure we're keeping up with market conditions."
The products advisers are using for portfolio construction
Ally Selby: What products are you using at the moment? Has that changed? Did you use to like passive products, are you completely an active girl right now?
Candice Bourke: I think with the 13-year bull run that we had with low interest rates after the GFC, you could easily put money in a passive ETF, tracking an index, and do well there. So we've seen a shift moving more towards quality. Like Charlie was saying, we're looking at balance sheets, we're looking at fundamentals. So looking at active ETFs and actively managed funds, and then also complementing that with direct positions that we have a high conviction in.
Ally Selby: Is that a short-term trend? I feel like SPIVA data shows that over the long term, most active managers actually underperform their benchmark. Is it a new market environment now?
Candice Bourke: It's changing every day, right? So we wake up and the market moves so rapidly. Again, going back to the message with clients, I think we want to pick long-term conviction investments that are keeping up in the inflationary environment, in the deflationary environment, who really cares long-term what happens to interest rates. It's all short-term noise. Just stick with the conviction long term.
Ally Selby: Okay. Over to you, Charlie. What products do you use right now, and how has that changed over the last decade?
Charlie Viola: It probably hasn't changed that much, to be honest. We're a big one for holding good quality, diverse investments. When we hold a basket of stocks, we're really looking for those key fundamentals - so key competitive advantages, good balance sheets, good management, and we want diversity. So we've always held good exposure to real assets in our client portfolios. What we've probably done in the last six months or so, is a little bit more interest rate-sensitive stuff. So a few more credit things and a little bit more in the debt space.
But I probably disagree with Candice. I'm a big one for efficient market theory. I think if you just continue to buy good quality assets, that over time, you're going to see that cream rise to the top and you're going to see earnings growth take over and revenue production continue to increase.
So look, I'm just a big one for keeping it really simple by buying good quality assets. Take exposure to broad-based indexes, and live off the revenue stream that it's providing.
Can you build the perfect portfolio with listed products?
Ally Selby: Okay, so Livewire's Listed series is all about how investors can build the perfect portfolio on the ASX. Charlie, I want to know if that's even possible. Do you think investors can build the perfect portfolio on the ASX? What does an effective portfolio look like to you?
Charlie Viola: Remembering that an effective portfolio looks different for different people. So I have three fundamental rules. One is to make sure you're investing to your objectives from a timeframe and a risk point of view. Secondly, be diverse. And the third and most important thing is to continue to buy quality. So from my perspective, as long as your portfolio has got a good smattering of large-cap, broad-based ASX ETFs, for example, the Vanguard Australian Shares Index ETF (ASX: VAS), whatever it might be, and you're coupling it with a good exposure to the mega-cap US stocks, like the Vanguard US Total Market Shares Index ETF (ASX: VTS), and international stocks, and then you've got a smattering of credit and debt and property stuff in there, the reality is over time it's going to go okay, as long as you're buying at the top end of that quality spectrum, you will be fine. And you also need to make sure you are continuing to invest through the cycle.
Ally Selby: Over to you, Candice. What does an effective portfolio look like to you? How can investors make their portfolios work for them?
Candice Bourke: Again, always a starting point is what are your goals and objectives. That lays the foundation for how we can create the perfect portfolio in your terms.
I don't think there's a one-stop-shop solution. What works really well for our model is the core-satellite approach, which really is the answer to the previous question as well, on how has it changed. Well, your core satellite methodology doesn't change.
Let's say, for example, you're building a 70-30 portfolio. Typically, we call that a balanced or slightly more growth orientation. Within the growth asset allocation, we might look at putting quite a lot into the core model, so that's strong balance sheets, quality businesses that can survive over the long duration in terms of many market cycles, 5, 10, 15 years plus.
And then around the side, we'll have satellite ideas. That might be a thematic that we're really into - lithium, all the EV decarbonization play. That's taking a smaller risk in the portfolio, so we don't have massive concentration there. That's where we like to do active ETFs, for example, because you're getting a basket approach to that particular thematic.
But again, if an investor can answer the question, "Is it hitting my income needs if I have them? Is it hitting the capital expectation I'm expecting? Do I know what I'm invested in? Do I agree with that? Has it got the ethical filters if I need it?" If you can answer most of these questions, I feel like you're on the right path to having an efficient, effectively run portfolio.
Advisers' top exposures for offence and defence
Ally Selby: I want to talk about how you're actually getting exposure within clients' portfolios right now. Can you take me through some examples of an ETF that you really like for exposure to equities, for example?
Candice Bourke: Of course. So just focusing on the Australian market, what we're really liking at the moment is the VanEck Australian Equal Weight ETF (ASX: MVW).
I believe at the moment with what we're seeing really playing out in the market very quickly, you just want to have a nice exposure to the top end. Like Charlie and I are saying, flight to quality, fundamentals, strong dividend growth, rock-solid balance sheets, really monopoly businesses there that again, can ride many different market cycles.
Ally Selby: And on the other side of the coin, how are you getting exposure for defensive assets within portfolios right now?
Candice Bourke: So we could look at a couple of different managed funds. A lot of the managers these days are also doing active ETFs, which is fantastic because they typically have a lower all-cost fee. One that comes to mind is the Metrics Master Income Trust (ASX: MXT). They're a fantastic credit manager. We also like, at Shaw and Partners, going into the Australian hybrid market. That has come off a lot lately with all the news with Credit Suisse.
But again, we've got a very different Australian banking system compared to offshore. A lot of offshore banking regulators look at the Australian system and take notes and lessons from what we do really well. So in the current floating rate interest market, and we do think we are potentially at peak rates, you are getting a 6% to 7% yield, which is quite attractive for that defensive part of the market.
Ally Selby: It's almost equity-like returns. Okay, over to you, Charlie. How are you getting exposure to risk assets at the moment?
Charlie Viola: I also like MVW, the VanEck Equal Weighted ETF, it equally weights the top 78 stocks. It's a good way to do it if you don't want this kind of massive overweight exposure to the banks and resources.
But again, I'm a big one for keeping it simple. Just go and buy SPDR S&P/ASX 200 Fund (ASX: STW). You're getting that broad-based exposure to markets, the yield's 4.5%, 70% franked. Stick it in the bottom drawer and get rich off it is my view. So just again, people, keep it simple and buy quality.
Ally Selby: Okay. How about defensive assets? How are you getting exposure there?
Charlie Viola: We like a few things. It depends on what you mean by defensive. I actually sometimes think that large-cap Australian equities are defensive, to be honest, because they're all good quality companies generating revenue, lots of people use them, and they're part of our everyday life.
But if we have to kind of do the whole strict, which is kind of rubbish, between income and capital thing, we quite like the Qualitas Real Estate Income Fund (ASX: QRI), which is just a big basket of Australian mortgages, about 60% LVR, I think it's paying a yield of 8% or 9% at the moment. It's trading at a minor discount to its NTA. So that's an easy one.
We also like Metrics. Metrics have got a listed product, MXT. So it's kind of fine.
I'll disagree with Candice. I'm not a big fan of hybrids, to be honest. I think hybrids, if you are genuinely looking for a fixed interest exposure, the reality is the hybrids, in my view anyway, they're right at the bottom of the stack. So if anyone doesn't understand where the hybrid sits - if the bank goes broke, everyone lines up to get money, the guy at the back of the line is the shareholder, and the guy in front of the guy at the back of the line is actually the hybrid holder. You're taking equity risk to get fixed income returns. You might as well just buy the equity, to be honest, and you're going to probably get better yields. So for us, that's not actually reducing your risk profile.
The products that no longer have a place in portfolios
Ally Selby: That was actually my next question. I want to know what product or fund you think no longer has a place in investors' portfolios. Obviously, the investment environment has really changed over the last two years. Really in the last year since we've seen inflation rear its head and interest rates start to rise once again. What product no longer has a place in investors' portfolios?
Charlie Viola: So the thing I'm probably not a big fan of and have never been a big fan of is REITs. So listed property companies. I'm of the view that if you want property exposure, go and buy assets or ETFs that have got real property exposure where you can look through to the underlying asset, you can see the revenue being produced by rent or what have you.
Ally Selby: How about fund managers who invest in REITs? Would that be a safer bet, or still absolutely no?
Some of these REITs, which in reality are just investment banks using their balance sheet to try and generate an arbitrage - the difference between the income that you're getting and the cost of the debt - just get absolutely belted around when you see interest rates go up. And they're really the first to get hammered in any of these kinds of unstable periods. And we saw it through GFC, we saw it through COVID, and we're seeing it again now, that they're all getting belted.
We're not a big fan of going out and buying things like Stockland (ASX: SGP) and Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX) or any of those types of companies.
Charlie Viola: Like I said, when we want property exposure, we want actual property exposure. So we want to be able to see the actual underlying assets, see who the tenants are, see where the yield or the revenue is coming from, and see what the WALE is. We want real property exposure, not banking on a management team working out how they best leverage a balance sheet.
There are a number of those products out there that do a good job. Goodman Group (ASX: GMG) do a really good job because they've just gone and bought good quality industrial assets. Charter Hall (ASX: CHC) has got a number of actively managed effectively ETFs. So the Charter Hall Long WALE REIT (ASX: CLW) where they're just going and buying good quality properties with long WALEs or long lease periods. Those sorts of things are okay to buy because you're buying the actual assets themselves, which is generating the revenue, which is filling up your bank account with cash.
Ally Selby: Okay. Over to you, Candice. What product or fund do you think no longer has a place in investors' portfolios?
Candice Bourke: Before I get to the answer, I just want to make a comment on what Charlie said. I do agree generally, with your comment, but I want to point out that what a lot of the market misses is that Goodman Group is not really a REIT anymore these days. The business model's really changed. It's more of a logistics company. Last time I checked, I think it pays a 1.5% dividend yield. So I still think there are some quality property exposure companies you can get in the Australian market.
And then also we have to remember, typically, Australian investors are overweight property already, with their own residential properties. So we like to, at Shaw and Partners, take a holistic approach in that sense, and we'll typically know that the chunk of their wealth is in that asset class already. So we look at other opportunities like tech, healthcare, and infrastructure.
So coming back to your question, Ally, it's really a short, sharp, simple answer. It's crypto. So if you have made money in that asset class in any way possible, congratulations. This is not personal advice. I think you should potentially think about selling. I believe there are lots of different products out there that are in that space. I think there's one called literally Crypto as an ETF - the BetaShares Crypto Innovators ETF (ASX: CRYP). So that would be something we're avoiding and have been in the last two, three years with the rise.
We've had clients ask us about that asset class. Again, big debate. Is it an asset class? My opinion is I don't see a lot of intrinsic value there still. It could be something definitely in the next decade that stays around, but always we would say, "Let's back the innovative tech companies in the payment sector doing really great disruptive things." I think of PayPal (NASDAQ: PYPL).
Ally Selby: Okay. Well, that's all we have time for today. I hope you enjoyed that episode as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.
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Livewire Markets
Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
Expertise
Livewire Markets
Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
Expertise
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